How to audit income tax - two models combined
Eeghen, W.J.B. van
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A basic model of linear income taxation is proposed for analyzing optimality in auditing income tax reports. A game-theoretical approach is used for deriving the optimal strategy for the tax administration. Taxpayers minimize expected costs including possible penalties for under-reporting while the tax administration chooses its audit policy to maximize expected revenue. A simple strategy of only two audit rates is shown to be optimal in most cases.